Intended or Unintended Consequences of Business Acquisitions: The Case of Financial Services Institutions

Abstract

ASC 805 gives the management of an acquiring firm flexibility in valuation and the possibility of recognizing day one bargain purchase gains (BPG). BPG acquisitions occurred frequently in the financial services industry during the crisis of 2008 and some of these acquisitions were assisted by the FDIC which provided partially indemnification against future losses. The combination of these two events set up a unique situation to study fair value accounting. By using the data from all bank transactions, we are able to highlight the fundamental tension between relevance and reliability in fair value accounting. Our results show that in FDIC assisted transactions, fair values reflected the underlying economic transactions more accurately whereas non-FDIC assisted BPG transactions suggest that management was able to use inflated fair values to present an overoptimistic picture of the acquisition.